British Pound Drops on Rising Rate-Cut Expectations

By Avantika Chilkoti

The British pound fell below $1.30 Monday amid growing expectations of an interest-rate cut by the Bank of England.

The currency's decline followed disappointing economic data and comments from U.K. central bank officials in recent days indicating a willingness to cut rates. The weak economic figures suggested uncertainty around Brexit has hurt the U.K. economy more than many analysts had expected.

The pound fell 0.6% against the dollar, reaching its lowest level since Dec. 25. It has dropped around 2% in 2020.

At the start of the year, few investors forecast the Bank of England's policy rate would fall in 2020. But those expectations have shifted amid further uncertainty around the U.K.'s trade relationships after Brexit.

The U.K. is set to leave the European Union on Jan. 31, although its current access to European Union markets will continue until at least the end of the year while a long-term trade deal is hashed out.

On Thursday, central bank Gov. Mark Carney said policy makers were prepared to take "prompt" action if economic weakness persists. Two members of the bank's monetary policy committee have spoken out since, suggesting they would vote for a rate cut if economic data don't improve.

"They have got a coordinated message going out that we are not going to stand by and wait for evidence that the economy has bounced back," said John Wraith, who covers U.K. rates strategy and economics for UBS.

The probability of a 25 basis-point cut in the policy rate -- from the current level of 0.75% -- at the Jan. 30 meeting has risen to 49% from 5% at the start of last week, according to CME futures data.

Adding to expectations of monetary loosening, official estimates out Monday showed U.K. gross domestic product fell 0.3% in November from the previous month. That compared with expectations for 0.1% growth in a survey of economists by The Wall Street Journal.

The U.K.'s FTSE 100 equities benchmark gained 0.3% Monday, while the FTSE 250, which includes companies with a greater focus on the domestic economy, was up 0.9%.

Meanwhile, the yield on 10-year U.K. government bonds fell to 0.733% from 0.772% Friday.

Analysts at Investec said the move in sterling showed that economic data and central bank commentary have "regained their mojo" as the primary drivers of the currency. However, Brexit and EU trade talks are expected to regain influence on the currency in the longer term, the analysts said.

Write to Avantika Chilkoti at Avantika.Chilkoti@wsj.com

(END) Dow Jones Newswires

January 13, 2020 10:12 ET (15:12 GMT)

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